Taxation, Government Spending, Keynesian Economics, Supply-Side Theory, and the Bipartisan Achievement of Borrowing More Than Any Government in Human History
Taxation, Government Spending, Keynesian Economics, Supply-Side Theory, and the Bipartisan Achievement of Borrowing More Than Any Government in Human History
The Money Has to Come From Somewhere. It Has Not Always Come From Somewhere.
The federal government collects approximately $4.4 trillion per year in revenue, primarily through individual income taxes, payroll taxes, and corporate income taxes. It spends approximately $6.5 trillion per year. The difference – approximately $2.1 trillion – is the annual deficit, which is added to the national debt, which stands at approximately $34 trillion, which is approximately 120% of gross domestic product, which means the United States government owes more than the entire economy produces in a year, which is a number so large that it has lost its capacity to shock and now mainly serves as a data point in arguments between people who believe it is a crisis requiring immediate action and people who believe it is manageable given the dollar’s reserve currency status, with both sides having made their arguments for 40 years without either convincing the other or changing the trajectory of the debt, which has continued upward regardless of which party held power, which party proposed fiscal responsibility, or which commission recommended a solution.
The national debt is the accumulated result of 235 years of government decisions to spend more than was raised, primarily during wars, recessions, and crises, and then partially but not fully to reduce the deficit during periods of growth and stability. The debt grew dramatically during World War II, shrank relative to GDP during the postwar boom, grew again during the Reagan tax cuts and Cold War defense buildup, declined relative to GDP during the Clinton surplus years (the only years of genuine surplus since 1969), and then grew sharply through the Bush tax cuts, the Iraq and Afghanistan wars, the 2008 financial crisis response, the Obama stimulus, the Trump tax cuts, and the COVID-19 pandemic response. The debt is bipartisan. Both parties have contributed to it. Both parties have claimed to oppose it. Neither party has reduced it when in power. This is the most consistent bipartisan achievement in American fiscal history.
The Tax System: Raising Revenue Through Organized Complexity
The United States tax code runs to approximately 2,600 pages of statutory text and approximately 70,000 pages of regulations, rulings, and guidance. This complexity is not accidental. Each provision reflects a decision – by Congress, responding to advocacy by interest groups, constituents, or ideological commitments – to treat some category of income, expense, or transaction differently from the baseline. The mortgage interest deduction reflects a decision to subsidize homeownership. The capital gains preferential rate reflects a decision to treat investment income more favorably than wage income. The employer health insurance exclusion from taxable income reflects a decision, made during World War II wage controls and never revisited despite decades of tax reform discussions, to subsidize employer-provided health insurance through the tax code. The deduction for charitable contributions reflects a decision to incentivize private philanthropy as a supplement to public provision of social goods.
Each provision has constituencies – homeowners, investors, employers, charities – who benefit from it and whose political influence makes it resistant to reform. Tax reform – simplifying the code, broadening the base, lowering rates – is proposed approximately every decade and achieved approximately never, because every provision targeted for elimination has a constituency prepared to defend it, and the aggregate political cost of eliminating all provisions is higher than the aggregate political benefit of the resulting simplicity. The code remains complex. The complexity generates compliance costs estimated at $400 billion per year. The compliance costs generate employment for tax professionals. The tax professionals include some of the most effective lobbyists in Washington. The circle is complete and has been rotating since 1913.
Entitlement Spending: The Math That Neither Party Will Do Publicly
Approximately two-thirds of federal spending goes to mandatory programs – Social Security, Medicare, Medicaid, and other entitlements – that are not subject to annual appropriations but are determined by eligibility rules set in statute. If you meet the eligibility criteria, you receive the benefit. The cost is whatever the eligible population costs. The eligible population is growing, because the Baby Boom generation is retiring at a rate of approximately 10,000 people per day, and because people live longer than they did when Social Security and Medicare were designed, and because healthcare costs more than it did when Medicare was designed, and because the worker-to-retiree ratio has declined as the population aged, reducing the tax base relative to the benefit population.
The Social Security trust funds are projected to be depleted in the early 2030s under current law, at which point benefits would be automatically reduced to approximately 75% of scheduled amounts unless Congress acts. This has been known since approximately the 1980s. Congress has not acted, because acting requires either raising taxes or reducing benefits, both of which are politically difficult, and the difficult decision can always be deferred to the next Congress, which will also defer it, until the trust fund depletion is sufficiently imminent that deferral is no longer possible. At that point, Congress will act in the urgency of a manufactured crisis, producing a solution that satisfies no one, and then take credit for saving Social Security, which it will have done only in the sense of having waited until the last possible moment to fix a problem that was clearly identified decades earlier. This is not unique to Social Security. It is the fiscal policy equivalent of the democratic process’s general preference for visible action in crisis over invisible action in anticipation. The crisis concentrates minds. The anticipation does not. The debt grows while the minds wait to be concentrated.
SOURCE: The London Prat